Should I buy Arista Networks shares after a strong Q1 performance?

Arista Networks, Inc. (NYSE: ANET) posted first-quarter results that topped expectations, and Jim Suva, an analyst from Citigroup, assigned a buy rating on Arista shares.

Citigroup has a positive view of Arista Networks

Arista Networks reported better than expected first-quarter results on Monday; total revenue has increased by 31.4% Y/Y to $877.07 million, while the first quarter non-GAAP EPS was $0.84 (beats by $0.03).

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Total revenue has increased well above the prior guidance, and the company continues to benefit from lower COVID-related travel and marketing expenses. The overall gross margin in the first quarter was 63.9%, while the operating expenses were $225.3 million or 25.7% of revenue.

Arista Networks repurchased $136.2 million of its common stock during the first quarter at an average price of $116 per share, and the company’s management said that the amount of future repurchases is dependent on the market conditions.

Arista Networks updated financial guidance for the second fiscal quarter, and it expects total revenue to be in a range between $950 million – $1 billion, including approximately $50 million of cloud-related deferred revenue recognition from the balance sheet.

The non-GAAP gross margin should be between 60% to $62%, even though Arista will continue to grow investments in R&D  and marketing. Ita Brennan,  CFO of Arista Networks, said:

As we progress through 2022, demand metrics remain strong across the business, with particular strength from our Cloud Titan and other cloud and enterprise customers.

Jim Suva, an analyst from Citigroup, said that Arista appears to be gaining market share from Cisco, and he assigned a buy rating with a price target of $160.

Arista Networks is in a good position to grow its business, but with a $34.2 billion market capitalization, this company is not undervalued, and the risk/reward ratio is not good enough for “value” investors currently.

Arista trades at more than thirty times TTM EBITDA, the book value per share is less than $15, and the company will continue to operate in a challenging environment, affected by high inflation and global supply chain challenges.

Because of this, it is probably not the best moment to buy Arista Networks shares at the current price, and if the U.S. stock market enters a more significant correction phase, the share price could be at much lower levels.

$100 represents a strong support level

The strong support level stands at $100, while $130 represents the first resistance level. If the price falls below $100, it would be a “sell” signal, and we have the open way to $90 or even below.

On the other side, if the price jumps above $130, the next target could be at $140.

Summary

Arista Networks posted first-quarter results that topped expectations, and Jim Suva, an analyst from Citigroup, assigned a buy rating on Arista shares. Despite this, probably it is not the best moment to buy Arista Networks shares, and if the U.S. stock market enters a more significant correction phase, the share price could be at much lower levels.

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